Islamic Finance: Reaching One Billion People Of Africa

Despite the high concentration of Muslims across Africa, Islamic banking has been slow to grow. Baba Yunus Muhammad, Founder and Chairman of the Africa Islamic Economic Foundation (AFRIEF), discusses with Sarah Owermohle what the sector needs to do to realise its potential on the continentConsidering Africa’s large Muslim population, how has Islamic finance and banking evolved in the region?

Muslims constitute about 53.04 per cent of the over one billion Africans living in Africa, and going by the figures one could have expected the growth of Islamic finance to be higher than what it is today.

It is however important to know that Islamic finance is not for Muslims only. It is for non-Muslims as well. If you take the evolution of Islamic finance in Africa into consideration, you may agree with me that Islamic finance is not doing all that bad. We in Africa are always proud of the fact that modern Islamic banking first started in Africa in an Egyptian rural community called Mit Ghamr, in 1963. It was the success of this experiment that encouraged its adaptation in several Muslim countries.

The good news is that more and more prominent Africans from various faith traditions are now becoming aware of the reality and nature of Islamic finance, although some of them would have preferred it to be simply known as interest-free or alternative finance from the onset instead of Islamic finance or Shari’ah banking, especially in a religiously sensitive and highly sectarian and ethnically divided continent like Africa.

Investments and business conducted on Islamic finance principles in Africa in the last decade have gained momentum. Islamic finance has gripped the continent with a strong fervour and passion. Interest in this discipline has proliferated to over 40 countries, going beyond the predominantly Muslim countries. For quite some time now, many African countries have adopted an open door policy and provided a level playing field to Islamic finance. There is now an Islamic bank, Al Jaiz Bank, operating in Nigeria, with two or three commercial banks licenced to operate Islamic banking windows.

Every day, Islamic finance is breaking new boundaries and new frontiers. Leading global Islamic banks have fast spread their network from their respective home bases to develop a regional reach. Some of the Islamic banks in the Gulf are now entering African markets. Also in the meantime, Islamic finance has continued its expansion notably in Takaful, domestic and the Halal capital markets.

From a regulatory point of view, what can governments do to encourage Islamic finance? Which African governments do you think are leading in this regard?

When we talk of the regulatory aspects of Islamic finance we should not forget that originally and for a very long time, Islamic financial services operated in an unclear regulatory landscape. However, as they expanded, they presented several regulatory challenges that prompted governments to step in with the view to addressing them.

In Africa, the absence of sound regulatory frameworks for Islamic finance in several countries has posed so many difficulties and challenges for investors and operators. Several African governments, though aware of the potentials of Islamic finance, have not been able to develop regulatory frameworks due to the heavy financial commitments involved. Some find it difficult to convince their Christian majority populations of the rationale for using public funds to hire consultants to develop Shari’ah compliant frameworks.

I think the time has come for African governments to invest in the development of strong regulatory frameworks, if the sector is to be made a viable financial alternative capable of attracting FDI. This can be done by proactively encouraging, even mandating, Islamic financial services by law in their respective countries to support the expansion of the industry alongside conventional financial services.

This is where AFRIEF comes in. We support governments, national regulatory institutions like central banks and security, exchange and insurance regulatory bodies to develop plans and roadmaps towards a well-functioning Islamic finance system. We also provide them with all the necessary skills to implement these effectively.

I think Sudan is a good example as far as Shari’ah-compliant regulatory mechanisms are concerned. It adopted Shari’ah-compliant frameworks for the entire banking sector of the country in 1984. Nigeria broke new grounds in the realm of Islamic finance in Africa by creating in 2011 a formal and regulated Islamic banking sector alongside, and not instead of, its conventional banking sector.

The fact must however be accepted that organising an Islamic finance system is a difficult and complex task. It must be recognised that African countries that are opening their doors to Islamic finance are embarking on enterprises that are new to their financial systems. Being new, it is to be expected that the effort would be confronted with many unresolved issues, which we may consider as challenges rather than problems.

Therefore, having dual financial systems must be seen as an opportunity for demonstrating the possibility of harmonious cohabitation of the two financial systems. But we are not unaware of the abuses that go on within the Islamic window system. We have seen several instances where conventional banks rush to open Islamic windows in order to mobilise deposits of unsuspecting depositors who abhor Riba (interest-based) transactions. They set up what I call ‘kangaroo’ Shari’ah Supervisory Boards (SABs) to legitimise their transactions. But once the deposits are mobilised they find their way into unethical investment ventures.

This is why it is also important for African governments to promote the growth of Islamic finance by separately regulating unique aspects of Islamic finance, such as Shari’ah Advisory Boards (SABs). For example, several areas–Kuwait, Jordan, Lebanon, and Asia and North Africa–have felt the need to regulate the competence and composition of SABs, as well as related rules governing appointment, dismissal, and qualifications of SAB members. In my opinion, for Islamic financial institutions to perform their genuine roles in the societies in which they operate, they must be fully governed by effective regulatory frameworks.

What do you think is the best strategy for Islamic finance’s base growth and outreach?

If you are in business in Africa for just an hour, the most formidable challenge you will certainly face is how to access financing for your business. This is a continent where everybody acknowledges the vital role of small and medium enterprises (SMEs) in promoting economic growth and creating employment. Despite this, SMEs are facing more difficulties in accessing financial resources in Africa more than any part of the world due to their lower capital, higher risks and less competiveness. In my opinion, this is a huge opportunity for Islamic banks to capture. Islamic finance, with its robust risk sharing mechanism is known to operate very well in the area of trade and SME financing.

Therefore, I think the best growth strategy for Islamic finance in Africa is to channel resources and efforts towards the development of trade and SME financing structures in African countries. If Islamic financial institutions operating in Africa were to dedicate a large portion of their resources towards the development of trade and SMEs in Africa, they could have laid a long-term foundation for the constructive development of the continent.

I would also like to see Islamic financial institutions operating in Africa utilising the Islamic finance concept of Qard Hassan–the good or benevolent loan–as a strategy to establish a caring society, mobilise wealth, encourage good deeds and help those in need.

What do you think should be the biggest priorities for the sector’s growth in Africa this year?

For the speedy growth of the sector, we have to begin to examine ways of removing barriers and supporting market-driven growth and innovation, with a broad objective to maintain a favourable tax, sound regulatory and governance framework for Islamic Finance to give Africa a competitive edge and ensure the sector’s future stability and viability. The broadening of the skills base in Islamic finance is a matter of great importance which should be accorded the appropriate priority since the number of qualified practitioners, as well as Shari’ah scholars available for Shari’ah supervisory boards, is currently very low.

The Africa Islamic Economic FoundationThe Africa Islamic Economic Foundation (AFRIEF) is an international non-profit organisation with its headquarters located in Tamale, in the Republic of Ghana. It is committed to promoting and fostering Islamic economics, finance and ethical investments in Africa. It collects and shares the experiences and best practices of recent Islamic economic and finance projects in Africa.

Within the general promotion of Islamic economics, finance and ethical investments, AFRIEF focuses its efforts on creating concrete and pragmatic goals. Through collecting and analysing data, organising and hosting conferences, drafting and presenting reports, and, perhaps most importantly, by running field-projects in many countries, AFRIEF compiles the collective and individual experiences of peoples, organisations, companies and countries from all over Africa.

By and large, the central focus of AFRIEF’s academic inquiry is Islamic economics, finance and innovative solutions that centre on economic growth, investments, creating alliances and fostering relationships, developing young talents and entrepreneurs and conflict prevention and resolution.

What is the purpose of the Africa Islamic Economic Forum, AIEF 2015, in Ghana in April 2015?

The theme of AIEF 2015 is Stimulating Economic Growth and Cooperation through Islamic Economics. The goal of the Forum is to promote more critical and informed discussions on a topic of growing relevance in recent years. Growing socioeconomic challenges, such as perennial problems of poverty, persistent youth unemployment, excessive inequalities of income and wealth, high levels of inflation, large macroeconomic and budgetary imbalances, exorbitant debt-servicing burdens, inadequate and aging public utilities and infrastructure, skyrocketing energy prices, and growing food insecurity have all combined to undermine current development efforts of developing countries, particularly in Africa, and have pushed further behind their state-building goals. With many losing faith in the efficacy of the conventional economic and financial system, particularly after the recent global economic crisis, the potential role of Islamic economics and finance in providing a complementary or alternative framework for development efforts, is being encouraged.

AIEF 2015 is expected to provide a platform for key stakeholders, policymakers, business leaders, academics, researchers, students, practitioners and other leaders of society from within Africa and beyond to critically and objectively examine the purposes, theory, practice, structure, and institutions of the rapidly developing field of Islamic economics, for the purpose of creating a robust Islamic economic and finance framework which will contribute to the socio-economic development of Africa.

The event, which will be structured around six thematic pillars–faith-based investments and social responsibility, Islamic banking and finance, agriculture, the Halal industry, developing an investment environment and renewable energy with a focus on biofuels–is expected to be an inspiration for its participants to find efficient solutions.